Planning for Your Ranch’s Future: Advice for Succession Planning
Owners and their successors should also consider the following as they engage in these conversations: • Don’t make plans strictly based on limiting tax burdens. Plan for long-term viability and business continuity.
Contributed by Farm Credit Mid-America
There are plenty of uncertainties for farmers and ranchers today, but the future of the operation they’ve worked hard to build and sustain does not have to be on that list. While succession planning may not be at the top of a rancher’s mind as they grapple with the many challenges facing the industry, a sound succession plan should be something they have or are working to create today. This plan should be refined and communicated with others associated with the operation over time to ensure a smooth transition when the time comes. It’s not uncommon for cattle producers to question the need for and value of succession planning. But failing to plan today could lead to much larger issues down the road.
It could also mean transitioning the operation to another seasoned producer with many years of experience. Regardless of the situation, the rancher should move forward with choosing, grooming and educating his or her successor about the ranch’s unique needs. In many cases, finding someone who has off-farm experience as a successor can bring valuable insights and experience to the operation later on. Once the successor is identified, it is essential that this individual (or individuals) transition into their new leadership role over time. This includes allowing them to learn from triumphs and mistakes made along the way. It also means meeting regularly to review the operation’s records and financials as well as marketing and risk management plans together.
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Plan for cash outside the business to support the retirement of the current owner or owners. Keep in mind that selling land or equipment to the new owner in order to provide retirement funds could drain cash flow for the ranch. Keep in mind that buying out a sibling or other family members associated with the operation could drain needed cash from the operation. Use other financial vehicles to compensate any family member who will not be part of the operation going forward. Carry adequate life insurance to fill a gap that could result from the unexpected death of the primary owner. If there is no successor in place, the operation will need cash on hand until a transition plan is in place. Manage the ranch’s debt and cash in a way that anticipates transition. Growth, specifically late growth for the sake of transition, is not always required or appropriate. Plan for long-term, multi- generational growth. Doubling ranch or operation size in each generation to sustain more families is not necessarily an appropriate or good goal.
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Begin by Selecting a Successor
Get Financials in Order
Every ranch should have an informal board of directors – people who are the owner’s trusted helpers and advisors. This “board” should include the operation’s lender, financial advisor, accountant, attorney and insurance agent (to name a few). These individuals should be part of regular conversations that focus on capital management, which is critical for a succession plan to be successful. These can be difficult conversations, and their third-party perspective can be beneficial. Lenders are an important voice in those crucial conversations because they will help the current owner ensure assets that are necessary for liquidity, future borrowing, growth and expansion aren’t tied up.
Selecting the ranch’s next owner should begin with an open, transparent dialog about future plans with any family currently involved in the operation. At the end of the day, producing cattle is a business, not a birthright. In some cases, the owner may not have children or other family members who are interested in assuming responsibility for the ranch. If that is the case, the rancher should move forward with selecting a successor outside of the family. This could include finding a young or beginning rancher who wants to enter the industry and becoming a mentor to that individual with the intent of coaching them to take over the business.
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Finally, when it comes to planning, do not rely on what a neighbor or parent did. Remember that no single blueprint fits everyone, but everyone needs a plan.
ABOUT FARM CREDIT MID-AMERICA Farm Credit Mid-America is a leading provider of reliable, consistent credit and financial services to more than 134,000 farmers, producers, agribusinesses and rural residents in Indiana, Ohio, Kentucky and Tennessee. As part of the nationwide Farm Credit System, the cooperative helps to secure the future of rural communities and agriculture by remaining a reliable, consistent source of credit to farmers and ranchers. To learn more, visit e-farmcredit.com.
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